Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Monday, October 31, 2011

In a number of posts, I have alluded to the fact that Krugman denies that the Law of Opportunity Cost and the Law of Scarcity apply when the economy supposedly is in a "liquidity trap." Today, he seems to give some credence to real-live economic laws (as opposed to the stuff made up by J.M. Keynes), although he does not apply those laws evenly, which I guess is OK in the rarified air of the Princeton economics department.

His post continues the "weaponized Keynesianism" theme covered in a blog post earlier, and at one level, I agree with him. When a Republican makes the claim that cutting military spending will hurt the economy because it eliminates military-connected jobs, but yet claims that a "stimulus" either will have no effect or will be harmful, then he or she needs to be called out on that contradiction, and Krugman has every right to do it.

One of the reasons I cannot support most of the Tea Party candidates is that they support both the police state at home and military empire abroad, and both are destructive. (I'd say that they were destructive to a "free society," but our society long ago stopped being free, thanks to a tag-team effort by the Right and the Progressives.) Military spending that supports invasions abroad is destructive because it does not protect the people of this country, instead making them more vulnerable to revenge attacks from disaffected peoples abroad.

For that matter, I would much rather see a United States as a country where entrepreneurs are free to pursue ideas rather than the country it has become: a nation of people getting rich by being politically-connected with a gargantuan government that is increasingly protecting itself by means of utter brutality against innocent people who are deemed as "threats" to the existing order. If one wishes to invoke the term "sustainability," this is the perfect situation.

Unfortunately, Krugman takes another road and at the same time exposes his partisan viewpoints that masquerade as "economic" analysis. He writes:

...there are also darker motives behind weaponized Keynesianism.

For one thing, to admit that public spending on useful projects can create jobs is to admit that such spending can in fact do good, that sometimes government is the solution, not the problem. Fear that voters might reach the same conclusion is, I’d argue, the main reason the right has always seen Keynesian economics as a leftist doctrine, when it’s actually nothing of the sort. However, spending on useless or, even better, destructive projects doesn’t present conservatives with the same problem.

I'm not sure that Krugman really needs to play the role of the Official Psychoanalyst of the Right, but from what I can see, the Right is being consistent in that people from that political perspective believe that government should "protect" us from assaults from abroad, and in their view, military spending performs that duty. Many of us on the libertarian front argue, however, that the current direction of military spending does NOT fall into that "protect us" category, even if the original premise -- that government should protect us -- is correct.

Unfortunately, he then veers into a non sequitur that cries out for a response:

Beyond that, there’s a point made long ago by the Polish economist Michael Kalecki: to admit that the government can create jobs is to reduce the perceived importance of business confidence.

Appeals to confidence have always been a key debating point for opponents of taxes and regulation; Wall Street’s whining about President Obama is part of a long tradition in which wealthy businessmen and their flacks argue that any hint of populism on the part of politicians will upset people like them, and that this is bad for the economy. Once you concede that the government can act directly to create jobs, however, that whining loses much of its persuasive power — so Keynesian economics must be rejected, except in those cases where it’s being used to defend lucrative contracts.

What Krugman is saying here is that it does not matter if government blocks efforts of entrepreneurs and private business firms because, after all, government can easily replace the private economy through massive spending, financed by borrowing and monetary "creation." Thus -- and his logical construct really stretches credulity here -- if someone makes the claim that cutting military spending is bad because it eliminates certain jobs, that is "proof" that massive government regulations and control do not have any kind of negative effect.

Furthermore, throughout the article, he seems to be saying that government spending on military items prevents government spending elsewhere, an Opportunity Cost situation. Yet, Krugman has been arguing that government spending can be limitless (or close to it) in a "liquidity trap," so it would seem to me that if Krugman wanted to be consistent, he would say that we can have it all, both Military Keynesianism and Civilian Keynesianism.

So, we see The Great One invoking Opportunity Cost on one side of the ledger, but not on the other. This is pretty typical of his "analysis," which is unfortunate, given that some people think that Krugman is writing about economics, which is not the case. He is a political operative, period.

Sunday, October 30, 2011

I’ve written about this repeatedly in the past, but here it is again: Social Security is a program that is part of the federal budget, but is by law supported by a dedicated source of revenue. This means that there are two ways to look at the program’s finances: in legal terms, or as part of the broader budget picture.

In legal terms, the program is funded not just by today’s payroll taxes, but by accumulated past surpluses — the trust fund. If there’s a year when payroll receipts fall short of benefits, but there are still trillions of dollars in the trust fund, what happens is, precisely, nothing — the program has the funds it needs to operate, without need for any Congressional action.

Alternatively, you can think about Social Security as just part of the federal budget. But in that case, it’s just part of the federal budget; it doesn’t have either surpluses or deficits, no more than the defense budget.

Both views are valid, depending on what questions you’re trying to answer.

What you can’t do is insist that the trust fund is meaningless, because SS is just part of the budget, then claim that some crisis arises when receipts fall short of payments, because SS is a standalone program. (Emphasis mine)

Despite the claims by Algore when he was running for president 11 years ago that he would put SS funds in a "lockbox," there IS no "lockbox." The "trust fund" of what Krugman writes are government bonds, IOUs that only can be redeemed either by selling more bonds or with future tax revenues.

The vaunted "trust fund" is no trust fund at all. It is a piece of a fictitious Rob-Peter-to-Pay-Paul scheme that any one can recognized to be a fraud.

The first thing to say is that liberals shouldn’t engage in mirror-image thinking, and imagine that spending we dislike somehow lacks the job-creating virtues of spending we like. Economics, as I say often, is not a morality play. As far as creating aggregate demand is concerned, spending is spending – public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks. As I pointed out not long ago, a perceived threat of alien invasion, by getting us to spend on anti-invasion measures, would quickly restore full employment, even though the spending would be on totally useless object.

While I realize that Krugman is writing from a pure Keynesian point of view that says it is the spending and ONLY the spending that matters, it seems to me that where resources are directed DOES matter. During WWII, Americans had jobs and pockets full of money, but there was little to buy and a huge portion of the workforce was in the trenches in Europe and Asia or being shot out of the skies. Yes, the GDP was high, but Americans were not manufacturing wealth; it was destruction of wealth.

Again, I realize that Keynesians see only aggregates and that GDP making bombs is as good as GDP making bread. Frankly, I'd rather eat bread.

I also find it interesting that he praises Iceland for letting the banks fail when, at the same time, he also has claimed that Washington needed to bail out Wall Street. Indeed, as is pointed out below, maybe it would have been prudent to let ours fail, too.

Although Krugman writes of the "path not taken," the path he calls for is government control of the economy, easy money (inflation), central bank financing of government spending via the printing press, and capital controls. I would suggest that this is EXACTLY what is occurring today. If anything, the central banks and governments have blown up even bigger financial bubbles.

However, I would like to suggest another path: a real profit and loss system, not crony capitalism, and certainly not central bank financial tricks. End Update

As I write this, Paul Krugman is in Iceland and anyone who wants to watch him in a webcast can do so. Last month, when flying home from Latvia, we passed by Iceland and I can say that from the air, it is a barren place.

Its economy also has been barren, suffering a huge fall in about everything after its own speculative bubbles had fallen apart. Not surprisingly, Krugman claims that this was due to free markets, deregulation, and probably Milton Friedman, and the cure has been inflation and capital controls. Thus, Iceland is his poster child for doing things "correctly."

For every government-driven bad improvement you can find in the west, you’ll find boom-era Iceland taking it to the next level. Where the U.S. Federal Reserve’s promise to backstop financial institutions was merely implicit, the Central Bank of Iceland in 2001 gave an explicit guarantee to big banks, making it inevitable that they would become bloated with risky and ultimately toxic assets. Our own government-sponsored—and as of 2008, government-owned—entities Fannie Mae and Freddie Mac made a hash of responsible lending by buying mortgages in the secondary market (and as we now know, lying about the poor quality of debt on their books). But Iceland’s government-run Housing Financing Fund managed to do even worse, lending directly to borrowers and competing with private lenders on both interest rates and loan quality. By mid-decade 90 percent of Icelandic households had government loans, and no-money-down home purchases were as common in Iceland as they were in Florida. (Emphasis mine)

You see, Krugman always assumes that free markets, be they in finance or anything else, have nothing to keep them from running over the cliff, and only the stern hand of government regulation can save the markets from themselves. Yet, we know that a profit-and-LOSS system provides its own brakes, provided that governments don't try to override market verdicts, as they have done in the USA, Iceland, and Europe. As he always does, Krugman only tells part of the story.

As Cavanaugh notes, there is much more to the story than Krugman wants to admit. Iceland was not able to get much of anything resembling a bailout, and had to face the crisis alone:

This international neglect turned out to be Iceland’s saving grace. The crisis ended almost as quickly as it had begun. The Organization for Economic Co-operation and Development expects Iceland’s economy to grow by 2 percent this year and next. That’s not enough to replace the post-2007 loss, but it’s more than enough to return to the pre-boom trend line, and it’s much stronger than the performance of Portugal, Italy, Ireland, Greece, and Spain, affectionately know as the PIIGS economies. Iceland’s long-term interest rate, a not-inconsiderable 8 percent, compares well with a rate of over 13 percent for Greece, which is astounding when you consider that Iceland endured a default that Greece, in name at least, has so far avoided. The difference in unemployment—5.8 percent for Iceland against 16 percent for Greece—is even more striking. Iceland expects to have a balanced budget in 2013.

And then this, contradicting Krugman:

Paul Krugman naturally draws the wrong conclusion, contending that Iceland saved itself through rapid inflation and capital controls. This is like saying the March tsunami gave the people of Tohoku a nice chance to go swimming: Iceland’s central bank tried desperately to control the króna’s collapse before giving up. Nevertheless, Erlingsdottir is right: The “grownups”—a center-left coalition led by Social Democrat Johanna Sigurdardottir—are back in charge and have done their best to double down on the bad policies of the past, including reducing fish quotas when local fishermen most need to be producing and selling. The government is also, in the face of strong popular opposition, moving toward E.U. membership, which has worked out so beautifully for other troubled European economies.

So what’s causing the recovery? The plain-sight answer is the one nobody will consider. Iceland is coming back specifically because its banks went out of business. That happened in spite of strenuous public efforts, but the removal of the tiny nation’s colossally bloated financial sector turns out not to have eliminated all that much value.

There are some things to keep in mind. First, Iceland is substantially poorer than it was before. More people have work, but their real wages have fallen substantially from where they were before the crisis began. Currency crises have a way of exposing the problems, something Krugman does not want to admit, and the combination of default, inflation, and letting its banks implode means that Icelanders have received a huge dose of reality, and reality can suck at times.

Second, for all of the talk about rates of unemployment and having its exports being cheaper because of the decline in the country's currency relative to other currencies, inflation hardly is the miracle "cure" that Krugman claims it to be. Yes, inflation has cut the real wages Icelanders earn by substantial amounts, which means they have received a real cut in pay, which in turn makes their labor substantially cheaper. However, they still have to produce something, and that means directing resources to the sustainable lines of production in Iceland's economy.

Yes, I know that Krugman is a "macro" guy, and they look only at GDP figures. Thus, according to the Keynesians, World War II was a time of unprecedented prosperity because (1) everyone had work, and (2) GDP was high. What else do we need to know about the economy?

While Krugman has been touting bailouts and even having the Fed directly purchase government bonds to finance the government's operations (as though this were a magic elixir instead of the fraud it really would be), he forgets that Iceland's crisis was SO big that its central bank could not bail out anyone, despite an explicit promise from the central bank that it would backstop all losses. Furthermore, it never occurs to him that if we get rid of the moral hazard, we also get rid of the systematic wild speculation.

Instead, he continues to call for easy money, but he also wants that money to be tightly regulated, which in the end means that banks lend only to those firms that have a track record. One of the reasons there was so much pressure for deregulation in the 1970s and early 80s was that a large number of firms based upon the new high technologies and the new reality of telecommunications could not get capital from the usual lending sources.

For example, Ted Turner in setting up CNN, went to Michael Milken because the banks would not touch his cable news idea. Likewise, we never would have seen funding of a number of other familiar companies had the old regulatory structure remained. Unfortunately, what Krugman demands is both the old structure AND policies of easy money, which simply is not possible. Furthermore, his call for the Fed to be buying bonds wily-nily does not exactly speak to getting rid of the moral hazard that put us in this position in the first place.

If there is a lesson in Iceland, it is not what Krugman might be telling us. First, Iceland experienced the unthinkable: the utter collapse of its banks, but it lived to come back another day. On our front, for all of the dire talk of what might have occurred has the government not bailed out Wall Street, I believe that while the economy would have taken a hit, we already would be climbing well out of that hole and would in a full-fledged recovery.

Instead, we are in a depression, and Krugman is claiming that inflation and bailouts are the key to changing our economic direction. In other words, we can have prosperity and a free lunch, too. Just inflate.

Wednesday, October 26, 2011

One of the most enduring of Holy Doctrines from the Progressive Era is that "experts" employed by the government are wise and discerning, and new regulations, be they for finance or the environment, always work exactly as they are supposed to do. Thus, any new edict from the Environmental Protection Agency will do exactly as it says, creating a cleaner country and reducing pollution and negative health effects.

In a recent blog post, Paul Krugman continues this Progressive tradition of bowing to regulation in an attack on recent remarks by Republican Congressman Paul Ryan. First, Ryan's quote (responding to an attack by President Obama):

Just last week, the President told a crowd in North Carolina that Republicans are in favor of, quote, “dirtier air, dirtier water, and less people with health insurance.” Can you think of a pettier way to describe sincere disagreements between the two parties on regulation and health care?

True to form, Krugman responds by declaring that Obama MUST be telling the truth because, after all, according to The Great One, Obama's remarks are "a literal description of GOP proposals to weaken environmental regulation and repeal the Affordable Care Act".

One has to understand a few things about Krugman's statement. First, does he consider ALL environmental regulation ALWAYS to be good? For example, if the EPA tomorrow were to ban all private automobiles, would that in the end lead to a cleaner -- or dirtier -- environment?

Regarding ObamaCare, is he claiming that this law actually will result in MORE people receiving medical care? I don't see how that is possible, given that doctors will be under more scrutiny than ever, both with regulations AND criminal penalties, and they will spend more time than ever doing paperwork. (Talk to someone in a medical office and that person will give you a lot of information on just how much extra work government regulations create -- and labor is a scarce thing.)

Furthermore, what good is "access to insurance" if one cannot see a doctor? In some places in Canada, they literally have lotteries to see who is able to see a physician, which means the medical care is "free" (not paid directly, but indirectly through taxes) but for many people, unavailable.

As for environmental regulation, one of my areas of specialization has been environmental/resource economics, and one of my mentors, Bruce Yandle, has done a lot of research on the ACTUAL effects of environmental regulation. This point is important, because, unlike Krugman, Yandle has sought out to find out what really happens with regulation, as opposed to Krugman, who claims simply that a regulation always accomplishes its purpose -- if the correct party is in power.

Interested readers can look at the piece in its entirety, but from what we have found, the new regulations and restrictions are coming about because the EPA and the New Jersey Department of Environmental Regulation (where Lisa Jackson was before she became Obama's choice to head the EPA) are targeting "nutrients" (and especially nitrogen) have misdiagnosed the cause of the bay's demise. This should not be surprising, given that much of so-called environmental science today is utterly politicized.

In fact, both Moffitt and I are convinced that the directives of the EPA and the NJDEP will make the waters of Barnegat Bay MORE polluted and less productive than if these agencies had done nothing. I know, that is politically incorrect.

I found out just how politicized it was 20 years ago when I researched the EPA and acid rain, and it was made clear then and is even more so now that when the EPA funds scientific research, it EXPECTS results that are in line with its political leanings. I'm not kidding nor exaggerating, and have talked to EPA scientists who say that if good research contradicts the EPA narrative, then the research is ignored or suppressed, and those that insist on doing it find their careers in jeopardy.

So, instead of examining the results of regulation, Krugman simply looks at the so-called intentions of the framers of the rules, and then claims that anyone who disagrees with the regulations does so because he or she wants people to get sick and die. But, then, Krugman says the same thing about anyone who thinks the Keynesian narrative is wrong; the only people, according to Krugman, who disagree with Keynesian analysis are those who want others to lose their jobs, their homes, and maybe their lives.

Tuesday, October 25, 2011

It is an exciting day for Paul Krugman! His views have been endorsed by David Frum, who according to the Great One, has "wandered off the conservative reservation." That Krugman would go ga-ga over an endorsement from Frum is quite interesting, to say the least.

Frum is a hardcore, war mongering "neo-conservative," better known for his drum beating for the various U.S. wars in the Middle East. Furthermore, Frum always has been of the school of thought that wars are "good for the economy," and his main criticism of the U.S. Government has been that it is not invading enough countries, killing enough people, and taking away enough of our liberties at home.

Monday, October 24, 2011

When numerous financial houses and banks in the USA and Europe were finally exposed for their massive holdings of worthless securitized mortgages and the infamous Housing Bubble was exploding, the political and financial "leaders" around the world quickly decided upon the "solution": Create a bigger bubble, and use the government's ultimate "Rabbit-Out-of-the-Hat" scheme, which is getting the central banks to do what governments in Latin America and Zimbabwe have done to pull off the scam.

In a recent column, Paul Krugman excoriates these creators of the New Bubble for their actions. No, he is not declaring that all they did was to make the problem worse; instead, he tells them in no uncertain terms that, in his opinion, they didn't make the Bigger Bubble big enough.

Yes, had the U.S. and European central banks been even more aggressive in creating and sustaining a huge bubble in government securities (that are as worthless as the mortgage securities that turned toxic), then we would be in a real economic recovery right now. If you think I am joking, read what Krugman says:

Think about countries like Britain, Japan and the United States, which have large debts and deficits yet remain able to borrow at low interest rates. What’s their secret? The answer, in large part, is that they retain their own currencies, and investors know that in a pinch they could finance their deficits by printing more of those currencies. If the European Central Bank were to similarly stand behind European debts, the crisis would ease dramatically.

Yes, what Krugman is saying is that the central banks of the USA and Great Britain can print money to buy their own government securities and the process can go on indefinitely. Lest anyone think that printing more dollars and pounds might have a negative effect upon those currencies, Krugman also has The Answer:

Wouldn’t that cause inflation? Probably not: whatever the likes of Ron Paul may believe, money creation isn’t inflationary in a depressed economy. Furthermore, Europe actually needs modestly higher overall inflation: too low an overall inflation rate would condemn southern Europe to years of grinding deflation, virtually guaranteeing both continued high unemployment and a string of defaults.

Yeah, it all is Ron Paul's fault. But in the next paragraph, Krugman demonstrates that he wants the Federal Reserve System to do what has been prohibited from the very creation of the 1913 law that created the Fed: have the central bank purchase short-term U.S. Government paper in the primary market. He writes:

But such action, we keep being told, is off the table. The statutes under which the central bank was established supposedly prohibit this kind of thing, although one suspects that clever lawyers could find a way to make it happen.

The cynicism drips off the column with that one, and his comments are a dream come true for those who claim (falsely) that governments are "not revenue constrained," as though the printing press can erase the Law of Opportunity Cost. Krugman's Ultimate Solution, one that I have said for months underlies most of his economic commentary, is dependent upon printing money and nothing else.

Understand the logical construct of what Krugman has declared in this latest column. If the various central banks announce that they are going to start buying short-term government bonds from whatever country seems on the verge of default (or simply cannot pay its bills with regular tax revenues), this immediately will stop the various runs on banks that are holding this government paper, increase the value of government bonds, lower interest rates, bring more spending in the economies of the world, and give us a widespread economic recovery. That is the Krugman economic logic in one sentence.

So, recovery is just a "clever lawyer" away. Intent of laws that were written to prevent the U.S. and European governments from doing what Juan Peron did in Argentina and Robert Mugabe did in Zimbabwe mean nothing, and Krugman makes it clear that he really believes that the secret to prosperity is the printing press:

The story of postwar Europe is deeply inspiring. Out of the ruins of war, Europeans built a system of peace and democracy, constructing along the way societies that, while imperfect — what society isn’t? — are arguably the most decent in human history.

Yet that achievement is under threat because the European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap.

So, it turns out that the secret to Europe's prosperity was not producing goods and services that other people wanted and needed. Instead, the "secret" was political democracy and the welfare state, as though both of these entities actually produce something. No doubt, Krugman claims that these economies are in a "liquidity trap," and such a situation turns the laws of economics upon their heads. That is nonsense, pure nonsense, for no government and no economist can repeal the Law of Scarcity and the Law of Opportunity Cost.

The world is in financial trouble because central banks, the financial districts, and governments created massive malinvestments in housing and the stock markets in order to achieve a veneer of "prosperity." Those malinvestments have been exposed, and exposed greatly.

Instead of dealing with that reality, Krugman and others insist on creating a New Reality, one in which people are forced to "invest" in government spending, as though flooding economies with various currencies magically will bring back the prosperity that was lost. In other words, Krugman believes that creating The Mother Of All Financial Bubbles in government securities is going to bring our economies into the bliss of recovery. While Krugman uses the song, "There's a Hole in the Bucket," to push his point (the solution, according to Krugman, is to fill the "bucket" with newly-created money), he forgets that his logical constructs themselves are full of holes.

What happens when THAT bubble blows up like a volcano? Just print more money.

Thursday, October 20, 2011

After shilling for the George Soros inspired (and partially funded) Occupy Wall Street "movement," Paul Krugman now is turning back to environmental matters. In his column, he accuses Republicans of wanting to poison and kill Americans because some of them support the use of coal-fired electric power plants. (I cannot say that I mind criticism of the Republicans -- heck, Lew Rockwell's site takes the hide off them nearly every day -- but at least the LRC people are principled and non-partisan.)

For it turns out that there are a number of industries inflicting environmental damage that’s worth more than the sum of the wages they pay and the profits they earn — which means, in, that they destroy value rather than creating it. High on the list, by the way, is coal-fired electricity generation, which the Mitt Romney-that-was used to stand up to.

While Krugman in this column and in a recent blog post is quick to say he is not advocating shutting down power plants, given his rhetoric and, frankly, the conclusions he is drawing, the logical response is to shut off about half of the nation's electricity grid. That's right, almost half.

To allow them to churn out electricity for another second would, in Krugman's words, "make us poorer and sicker." So, why doesn't Krugman openly say that ALL coal-fired plants should be shut down immediately? Good question. After all, if the NET RESULT of these operations is to make us "poorer and sicker," then immediate relief would make us wealthier and healthier, right?

Last month, Krugman declared on this subject:

It’s important to be clear about what this means. It does not necessarily say that we should end the use of coal-generated electricity. What it says, instead, is that consumers are paying much too low a price for coal-generated electricity, because the price they pay does not take account of the very large external costs associated with generation. If consumers did have to pay the full cost, they would use much less electricity from coal — maybe none, but that would depend on the alternatives.

That, however, makes no sense. If coal is dangerous, then even forcing more environmental regulations upon it would not make it a whit healthier and it would drain our pocketbooks and, hey, what possible damage could destroying half of our capability to produce electricity cause, anyway?

What Krugman assumes is that there is little or no wealth created by coal-fired electricity, only damage. Furthermore, he assumes either that Americans would get along just fine with blackouts and brownouts, or that we could put windmills all over the place, which also is another green fantasy.

The more I read Krugman, the more I realize that his view of the "ideal" society is a Third World country. After all, electricity in many Third World places is very scarce and expensive. Moreover, since Krugman also believes that printing money creates a "free lunch" (to use his own words from The Return of Depression Economics), he definitely would be comfortable with the "free lunches" that Third World governments create daily with their printing presses.

Having only given the AER paper a quick read, I cannot comment on it. However, it seems to me from the first reading that the authors assume that electricity really is not very important in the lives of Americans, and since they live in states where only a tiny percentage of electricity is produced via coal, shutting down the power elsewhere wouldn't affect the authors very much.

Monday, October 17, 2011

After reading Paul Krugman's latest anti-Wall Street screed, I have decided that I agree with him on principle: We need to occupy the place that is more responsible not only for the financial meltdown, but for the world depression that has followed it.

That's right, I am calling for an immediate occupation of...Princeton University, and specifically, its economics department. There is no other place on earth that has given us more players and more enablers of the financial madness that has gripped this economy for many years.

First, the chief architect of the depression, Ben Bernanke, was the chair of Princeton's economics department, and it was on his watch that Krugman was hired at Princeton away from MIT, Krugman's doctoral alma mater. Bernanke then went on to a position on the Federal Reserve System's Board of Governors and help create the inflationary policies that followed in the wake of the Tech Bubble of the Bill Clinton years and then the Housing Bubble.

Bernanke always has been a champion of inflation, and one of his first speeches as a Fed governor, "Deflation: Making Sure it Doesn't Happy Here," set out the infamous "Bernanke Doctrine" which claims that inflation can be a cure-all for economic ills. (He and Krugman are of one mind on this subject, as both consider government-generated "money" to be a "free lunch" on which everyone can feast.)

Let us not forget where the "Bernanke Doctrine" (and its predecessor, the "Greenspan Doctrine") has led. If I can restate these doctrines, it would be the following message to Wall Street: "Don't worry about the financial bubbles you create because when you run over the cliff, Uncle Fed will be there to provide you with precious 'liquidity'.

Thus, in his attempt to keep a deep recession from happening, Ben Bernanke has created a depression, and according to him and his followers, the only thing that keeps us in this mess is that Goldstein, er, Ron Paul and others like him, is raising too much hell about the inflation. The only man alive who might have done more damage than Bernanke has been Greenspan, but the combination of the two inflationists has been the destruction of the economy.

Of course, Bernanke (and his alter ego Krugman) are utterly contemptuous of anyone who might think that spreading dollars around the world, bailing out this and that, might not have the desired effects of restoring the economies of the nations. Why would anyone even have the temerity to think that propping up unsustainable capital and directing investment away from those entities that actually are profitable might make things worse? After all, EVERYONE KNOWS that creating more money creates more "aggregate demand," and greater "aggregate demand" means more prosperity.

Second, one of Bernanke's main shills is Alan Blinder, another faculty member at Princeton and a longtime advocate of...inflation. I'd like to say that the current depression has been a case of the Blind (Bernanke) leading the Blinder, but from my perch, it looks as though the whole bunch has been blind from the start.

However, Blinder has managed to do damage not only in backing up Bernanke's inflationary urges, but also in advising the Obama administration on the disastrous "Cash for Clunkers" program. When an economics department is as destructive as Princeton's it is important to spread the destruction to all frontiers.

Third, there is Alan B. Krueger, the Princeton professor who claims that raising the minimum wage will result in...more employment. At his urging, the Obama administration prevailed upon Congress to jack up the minimum wage during a severe recession, with one of the worst results being the record unemployment among young black men. Yes, on one end we have Princeton giving us inflation, and on the other, Princeton making sure more people are out of work, a great one-two roundhouse against the economy.

And then there is Krugman. Yes, the Paul Krugman who advocates the destruction of capital through taxation and regulatory policies. The Paul Krugman who is demanding that the U.S. economy have the capital structure of a Third World economy, but with First World results.

With respect to Albert Einstein, I'd say that this was an economic definition of insanity: Following the disastrous policies of Third World governments, but expecting the results of an economy that welcomes real and profitable capital into its overall structure of production.

Saturday, October 15, 2011

One of the enduring themes in Paul Krugman's columns is that the entire economic mess today is due to the fact that "free markets" have been permitted to run wild, and had the entire economy been under state control, we would be prosperous and happy. His recent screed on the subject, while more of the same, also includes something that, frankly, is untrue: financial deregulation was borne out of free-market ideology:

In the real world, recent events were a devastating refutation of the free-market orthodoxy that has ruled American politics these past three decades. Above all, the long crusade against financial regulation, the successful effort to unravel the prudential rules established after the Great Depression on the grounds that they were unnecessary, ended up demonstrating — at immense cost to the nation — that those rules were necessary, after all.

As I pointed out in my last post, major deregulation efforts came through a Democratic Congress and President Jimmy Carter, who at last check still was a Democrat. However, another major deregulation moment came in 1998, when Congress repealed much of the Glass-Steagall Act and President Bill Clinton (who I think was and still is a Democrat) signed the bill. (I also need to point out that Regulation Q, which was part of the original G-S Act, was repealed in 1980 in the deregulatory act known as DIDMCA -- a move supported by the New York Times, which in modern times is not exactly known as a staunch supporter of free markets.)

But back when he was Speaker of the House, Gingrich was quite comfortable with the Fed. In fact he led the fight to repeal Glass-Steagall, a move that many argue was a key factor in the financial meltdown that occurred in 2008. Consider that when he talks about jailing "the politicians who put this country in trouble."

Check this excerpt from an April 1998 New York Times article on the effort to repeal Glass-Steagall and Gingrich's cozy relationship with Alan Greenspan:

It pitted Treasury Secretary Robert E. Rubin, who opposed the bill, against Alan Greenspan, the chairman of the Federal Reserve, who favored it.

All but a handful of big banks opposed the bill, as did nearly all small and medium-sized banks and savings and loan companies. Wall Street backed the bill, as did insurance companies. Consumer groups fought the bill.

While the debate has less to do with ideology than with members of Congress forced to choose among powerful friends, the end game came down to partisan maneuvering. Republicans from Speaker Newt Gingrich on down scurried through the afternoon to line up the necessary votes.

Less to do with ideology? What? CONTRADICT PAUL KRUGMAN? THE NEW YORK TIMES? Surely not!

But, it gets even better, as Mulshine highlights an interview with Ron Paul in which the congressman notes that he voted against repeal of G-S. That can't be, according to Krugman's theme, but there it is. Dr. Paul says:

I voted on the Glass-Steagal change and I voted against it. The free market though would not have a Glass-Steagal. Banks could do what they want and they have to suffer the consequence. The reason I voted against it, that bill did have some bad parts to it, but one of the reasons I argued against it, repealing it, it was that it was going to put a greater burden on the banks and the taxpayer was at risk, at greater risk through the FDIC and other insurance programs of the government.

In other words, Dr. Paul recognized the moral hazard in having the Fed acting as a backstop against bank losses (Surely, the Fed NEVER would do anything like that, would it?), and knew that the bill would foster excessive risk taking.

Paul Krugman forever is claiming that people who think free markets might be a good thing never take into account any of what has happened in the last decade, yet he cannot even correctly note who were the players in deregulation -- and who were not. While accusing others of running "down a rabbit hole," Krugman seems to have taken permanent residence in that same hole while claiming that his fractured version of history is the Only Truth.

Friday, October 14, 2011

I find it ironic that given this blog deals with Paul Krugman's residence in Economic Wonderland, The Great One himself has referred to the "rabbit hole" of Wonderland in his latest bout of Wisdom From On High (or at least from Princeton). As I read Krugman's current attempt to rewrite history, I find that he pretty much is sticking to the same fanciful script and calling it economics. In other words, while claiming others are living in Wonderland, Krugman actually is writing about himself.

Before going on, however, let me say how grateful I am to Krugman for his willingness to sit through yet another Republican presidential debate and to be our eyes and ears. Some of us unfortunates who either cannot find an available TV or who are too busy looking after our families to watch thank him for his important contribution to the civil and political fabric of our nation. Thanks, Paul!

Of course, because I have not watched the debates, I have been unable to catch the latest on 9-9-9 (which makes me think of the song from the Beatles' white album in which we hear over and over again, "Number nine, number nine, number nine"....) or Ponzi schemes or the name of Rick Perry's hunting club. You know, the important things.

However, I have my doubts that even the Republicans are blaming Barney Frank for this entire mess, although he did play an important role by shilling for Fannie and Freddie and helping to keep them alive in the days when they were leveraged about 75 to one. In other words, if they wanted to put some of the blame on Steven Gobi's good friend, I would not object.

However, it seems that Krugman really wants us to believe that the ENTIRE crisis was simply generated by the failure of unregulated private enterprise and that government did only good. You think I exaggerate? Read on:

In the real world, recent events were a devastating refutation of the free-market orthodoxy that has ruled American politics these past three decades. Above all, the long crusade against financial regulation, the successful effort to unravel the prudential rules established after the Great Depression on the grounds that they were unnecessary, ended up demonstrating — at immense cost to the nation — that those rules were necessary, after all.

But down the rabbit hole, none of that happened. We didn’t find ourselves in a crisis because of runaway private lenders like Countrywide Financial. We didn’t find ourselves in a crisis because Wall Street pretended that slicing, dicing and rearranging bad loans could somehow create AAA assets — and private rating agencies played along. We didn’t find ourselves in a crisis because “shadow banks” like Lehman Brothers exploited gaps in financial regulation to create bank-type threats to the financial system without being subject to bank-type limits on risk-taking.

Yes, you see that the financial deregulation that began in the late 1970s and was strongly bolstered by DIDMCA in 1980 was the product of Republican rule and ideology. (And Krugman has written that many times, folks, like it or not.)

Whoops! Democrats had the presidency AND overwhelming majorities in the House and Senate during those years. Being that Ted Kennedy was a major architect of deregulation, I had no idea the guy was a closet Republican, but there it is. Krugman has a Nobel, so he ought to know. (Notice that Krugman never even tries to look at what was happening during that time, events that sparked the deregulation movement. Instead, he rewrites history and attacks anyone who might challenge his false claims.)

Furthermore, let us look at why this housing bubble came about. In Krugman's Wonderland, banks just all of a sudden started going wild with mortgage lending about 20 years after some of the handcuffs had been taken off. There is no causality, nothing other than some of the regulations had been removed two decades before.

In Krugman's Wonderland, there are no government programs to promote home ownership, and the Federal Reserve System played absolutely no role at all in helping to provide the massive amount of funds that went into this bubble. There was no Community Reinvestment Act and no directives from the federal government that lenders target people with bad credit scores or no savings and tailor loans to fit their situations. Furthermore, there was no encouragement from Alan Greenspan's and Ben Bernanke's Fed to lenders that if they got into a pinch, that Uncle Sugar would provide the "liquidity" to get them through the crisis. No, none of that.

Wonderland Economics, you see, has no cause-and-effect. The government changes some of the rules for banking and -- Voila! -- years later, all of the lending institutions suddenly run off the cliff like a pack of lemmings. There is no reason, nothing. It just happens.

But, Krugman has yet another howler up his sleeve:

The demonization of Mr. Frank aside, it’s now obviously orthodoxy on the Republican side that government caused the whole problem. So what you need to know is that this orthodoxy has hardened even as the supposed evidence for government as a major villain in the crisis has been discredited. The fact is that government rules didn’t force banks to make bad loans, and that government-sponsored lenders, while they behaved badly in many ways, accounted for few of the truly high-risk loans that fueled the housing bubble.

I spoke to some real estate lawyers during the aftermath of the collapsing bubble, and they told me that both federal AND state government officials were pressuring lenders to reduce their underwriting standards, something that Krugman knows, but cleverly denies. To add to the government's role, Veronique de Rugy points out:

The federal government’s role in the housing market goes back at least to 1938, but that role changed fundamentally in the 1990s when the government made a push to increase homeownership in the United States. At that time, the federal government pursued several policies that were meant to encourage banks to lend money to lower income earners and to give incentives to low income earners to buy houses. The result, as we now know, was a gigantic amount of subprime mortgages at a time when house prices were starting to go down.

Does Wall Street deserve some of the blame? Absolutely. It was concentrating on the profit that could be made and ignoring risk. Mortgage underwriters, investment banks, rating agencies, and investors all made this mistake. Of course, the GSEs did the same thing. And remember, they also got the party started to begin with. It was their incredible performance from 2001-2003 that made banks take notice.

So were the GSEs the only cause of the housing bubble? Of course not. But it doesn't make any sense to say that they weren't a central cause or didn't play a major role. If you look at their enormous quantity of originations over the past decade, their presence is undeniable. And if you look at the losses they've sustained since then -- which have led to a $148 billion bailout so far -- it's hard to keep a straight face and say they paid enough attention to risk.

I would agree wholeheartedly with both de Rugy and Indiviglio. The banks and financial houses were irresponsible (that is a most mild term, as I cannot think of one that actually fits their conduct this early in the morning), but the fuel for their fires came in large part from government-sponsored entities.

Krugman wants us to believe that Wall Street entities all of a sudden came up with the idea of throwing huge amounts of resources into an unsustainable housing bubble. It just happened; there was no causality, nothing.

But Krugman is not done. No, while he writes of "rabbit holes," he also is promoting the economics of "pulling rabbits from hats." Yes, President Obama can turn things around with his latest "jobs bill" or the Fed can push "aggregate demand" through Operation Twist, and the beat goes on.

Krugman wants us to believe that government can subsidize us into recovery through "green jobs" while cutting out nearly 10 percent of the current electricity grid through environmental regulations. He wants us to believe that government can discourage capital formation through taxes and regulation and then claim it doesn't matter since there is "unused capacity" out there, so capital formation isn't necessary.

Perhaps I am a romantic, but I have this quaint idea that decorated academic economists should not act as shills for a particular candidate or political party. Furthermore, I have this quaint notion that economists really should be looking at cause-and-effect, as opposed to making political claims of good and evil, and then saying government is good (when the Democrats are running it) and private enterprise is evil (because profits are evil).

Tuesday, October 11, 2011

Although I find myself in disagreement with most of what Paul Krugman writes, he has some blog posts this week that definitely lend to larger discussion. The one I want to cover today is his one on "Financial Romanticism," although I do want to get to his post on the Austrian view of 100 percent reserve banking. (My guess is that Bob Murphy and maybe some others in the Austrian camp will jump on it before I do, and that is fine with me.)

Krugman is first and foremost a Progressive, and Progressives believe that a society makes "progress" by advancing the powers of the State. Unlike, say, Thomas Jefferson, who believed that the State gained power only by taking away liberties of individuals, Progressives want us to believe that freedom actually is enhanced when the State imposes its Wise Will upon individuals who may not know better.

In this post, Krugman openly mocks individual freedom with this title (and, of course, the South) and hints that only expansion of the State can make our lives better. And in this post, he lets us know that the government passenger rail service makes HIM feel more free, so it must be good. (That much of this particular "freedom" is financed by people who will not have the opportunity to ride on those trains, and who have less personal freedom of their own because government is confiscating their income to fund Krugman's rides, seems to be lost on Krugman. What matters is what HE wants, not what the Great Unwashed might think.)

His "Financial Romanticism" post does go into areas of thought that interest me, as I wonder if the Real World ever would permit a banking sector that is not bailed out at times. Before I give my own thoughts, however, let me deal with Krugman's point that because the fractional reserve system of modern banking can lead to a "cascading crisis," some sort of bank regulation is inevitable. He writes:

...even if you persuade yourself that the moral hazard created by financial firefighting outweighs the benefits of avoiding a 1931-style cascading crisis, the fact is that policy makers will intervene. Hank Paulson set out to make Lehman an example; two days later he was staring into the abyss.

So the only feasible strategy is guarantees and a financial safety net plus regulation to limit the abuse of those guarantees. It’s imperfect; it faces the constant threat of regulatory capture; but it has worked in the past, and it’s the only game in town. (Emphasis mine)

Thus, one tries to put the regulatory fences at a place where the banks don't get too big and the failure of one institution leads to a run on other banks. I understand the logic and realize that there is strength in his argument of inevitability, and appreciate his point that we are dealing in a second-best world.

There is something that Krugman leaves out, however, as his own Progressive thinking tends to lead him to the belief that the regulatory system that comes from the executive branch always will give the "best" results. The "rule by experts" has been a dream of Progressives for more than a century, and no public intellectual has absorbed this religious belief more than Paul Krugman.

As Krugman sees it, any regime that holds financial institutions completely responsible for their own entrepreneurial errors is bound to bow to the inevitable. If left on their own, banks become too big, and ultimately will be come too risk-loving, especially when they are not being reined in by risk-averse bureaucrats. And while he gives a nod to "regulatory capture" theory, nonetheless he seems to believe that the gods of expertise (and rule by the "correct" political party) ultimately will overcome such problems.

Krugman, however, leaves out something that I believe that the Austrians also forget (and I will critique both sides): politicians, like the famous bank robber Willie Sutton, also know "where the money is." Furthermore, unlike Sutton, who allegedly did not carry loaded guns into the banks that he robbed, the politicians tend to be much more predatory and threaten much more violence when they are seeking political "contributions" from banks and other businesses.

The regulatory theory to which Krugman refers is "Capture Theory," in which the entities that are regulated "capture" the process. The typical Progressive antidote to that theory is for regulators to be liberal Democrats who are so pure of heart and so wise and caring for consumers and True Believers in their Holy Mission that they are able to overcome the temptations. (Yeah, Krugman really does believe that, and for those who would argue, read his columns in the aftermath of Katrina. He claimed here and here that the problem was that the Bushies simply did not believe in the power and goodness of government.)

But a politician has an alternative for raising money: selling protection. He can agree not to do something that otherwise he says he would do, something that would reduce the wealth of the potential donor. The most obvious burden that can be threatened is a tax, but there are any number of others that a politician can propose and then withdraw for a price. A private citizen will be just as willing to pay for a special favor worth $1 million as he will to avoid a $1 million tax. (This assumes constant marginal utility of wealth; with declining marginal utility of wealth, a citizen will pay more to avoid the $1 million loss than for the $1 million gain.)

This, then, is the essence of the political protection racket. Superficially, selling special favors and selling protection do look the same: payment is made to the politician in both cases. But in the extortion racket, citizens are made to pay, not for special favors from Uncle Sugar, but to protect private wealth that they have earned the old-fashioned way, outside the political process.

He continues:

One observes this sort of protection being sold routinely, at all levels of government. Legislative extortion is commonly practiced through so-called “milker bills,” to use a term popular in California. A bill is drafted and submitted, not because there is any legitimate need for it, but because it threatens some private person or group that predictably will pay to have the bill withdrawn. “Juice bills” is another term for those legislative proposals intended to squeeze private interests for cash.

Now, I am sure that Krugman would note that McChesney is referring to the legislative branch of government, not the executive branch, where the Pure of Heart Regulators reside. His view is built upon the assumption that legislators are human, but regulators who prescribe to Progressive Theology are able to overcome any weaknesses of knowledge and any temptations to "sell out" to private industry.

That tends not to be the case, as the "revolving door" between the regulators and the regulated demonstrates. For example, after leading the Clinton administration's anti-trust case against Microsoft (which had been guilty of the "sin" of not making "donations" to politicians and paying proper homage to D.C.), Joel Klein went to work for an international firm to help them avoid anti-trust pitfalls, making millions of dollars in the process. (Much of the government's Microsoft work was done by private law firms that also made millions of dollars in the process, but no doubt everyone was working out of the goodness of their hearts.)

Krugman also fails to address the desire that individuals have for power, and when power and ego combine within the regulatory confines, one can find the prescription for outright dishonesty and tyranny. I remember when I wrote an article 20 years ago for Reason Magazine on acid rain that the way that the Environmental Protection Agency destroyed the career of a good scientist that the regulators in EPA engaged in one big power trip that had nothing to do with the science or the effects of so-called acid rain.

For that matter, anyone who goes through an airport security line or has dealt with any "law enforcement" agent employed by the feds knows that employees of the executive branch hardly are "dedicated public servants" who are pure of heart. People who have power without accountability are going to be tempted to operate at the lowest common denominator, and it does not matter if they are Republicans or Democrats.

On one last matter, Krugman seems to indicate that Henry Paulson was operating out of "free-market ideology" when he failed to intervene in the collapse of Lehman Brothers. Given that Paulson and his former firm, Goldman-Sachs, were major Wall Street players, I doubt seriously that Paulson saw his role as Secretary of the Treasury as being to promote free enterprise in finance.

I do conclude that I agree with Krugman in part: actually enforcing a regime of true free-market finance is difficult if not impossible. For example, in the 1840s, when there was no central bank to act as the "bail-out" entity, many U.S. states required banks to purchase the states' canal bonds in return for receiving and keeping state charters. When the states defaulted (they had not anticipated the growth of railroads), there were numerous runs on banks.

In other words, even if everyone wanted a free-market system in finance, politicians being what they are would be predatory, and bankers, in turn, would spread around money to influence politicians. There really is "nothing new under the sun," and I admit I don't have the answers here. But, neither does Krugman.

Sen. Rand Paul (R-Ky.) said Friday that he believes the Occupy Wall Street protests stem from divisive rhetoric from President Obama, who has called for the richest Americans to pay increased taxes to help close the budget deficit.

"I see the president's rhetoric of envy inflaming the public and saying, 'Go get yours because rich people don't deserve it,'" Paul said on Fox Business.

Paul said he was worried that the president would stoke the protestors' passions to the point that they could become violent.

"I see it as inflaming this Paris mob that I hope doesn't result in a lawlessness where they say, 'Well, gosh, those nice iPads through the window should be mine and why don't I throw a brick through the window to get them because rich people don't deserve to have them when I can't have them,'" Paul said.

(Actually, Rand Paul does not have to worry, as a lot of the protesters are carrying Macbooks, iPhones, iPads, and other instruments of technology that apparently they are simultaneously claiming are evil. No doubt, these people really would riot if their demands were brought to fruition and they no longer could purchase -- or even steal -- them.)

Indeed, with all of his own anti-enterprise rhetoric, what Krugman has been claiming is that a new war against capital formation somehow would help bring recovery. I don't know how that would happen, but Krugman has been saying that if the government were to sharply raise the capital gains taxes and then replace the coming dearth of private capital investment with government "investment" in things like "green energy," that we then would have a robust recovery.

Let us travel down memory lane to why we had the financial panics in the first place. The government was strongly encouraging banks and financial houses to "invest" in the housing market, and and said that Alan Greenspan needed a "housing bubble" to offset a dearth of private capital spending. And we got it.

This was unsustainable, and the Austrians got it early. Heck, even Krugman understood that this bubble would burst before it happened. (I told Allegany County's property tax board in 2006 that the bubble would collapse and that they should not base future financial predictions on the current situation. They laughed at me and one woman replied, "We don't see that happening.")

There would have been a solution to the financial crisis, and that would have been for the banks and financial entities to submit to market discipline. Don't forget that Krugman has parroted the usual line of "the panic happened because the Bush administration let Lehman Brothers fail."

No, Paul, Lehman Brothers failed because the banks -- operating under the infamous "Greenspan and Bernanke Put" -- were holding securitized mortgage paper that could not hold its value. The government bailed out a lot of the firms that drank the Kool-Aide, and Krugman endorsed the bailouts, which meant that some CEOs could hold onto their mansions in Connecticut.

Furthermore, let us remember that government housing policies drove this bubble and that the easy credit regime from the Fed -- again, done with Krugman's blessings and encouragement -- along with numerous government programs to push people into home ownership and, ultimately, into homes that were too costly for their incomes. For that matter, if Krugman really were against the creation of financial bubbles, then why has he endorsed Ben Bernanke's policies of spreading dollars around the globe to prop up both private malinvestments AND government bonds?

Let us be honest. When the entirety of the housing bubble was exposed in 2008, the banks got their bailouts (and Democratic politicians, and especially Obama, who was financed in part by Goldman Sachs, got their campaign contributions), and the Fed and the European Central Bank responded by creating an even BIGGER set of financial bubbles.

The situation is obvious: the combination of private mortgage AND government debt is unpayable and must be restructured. Krugman's "solution" is for governments and central banks to inflate currency in order to "deleverage" the unpayable debt and to repudiate debt through inflation. (One is reminded of debtors in Weimar Germany paying their debts with wagonloads of paper -- the ultimate Krugman "deleveraging solution.")

In the end, the banks pretty much have become the playthings of American politicians and labor unions, who have become the real plutocrats. We now have a president who declares that HE is the law, and that he can assassinate whomever he wishes, and if the target is an American citizen, the Constitutional right of "due process of law" means nothing. If that is not plutocracy, I don't know what is.

Furthermore, the unions were able to force taxpayers to pony up to bail out General Motors and Chrysler, and then to force bondholders for these companies to stand at the back of the line during bankruptcy proceedings, despite what the law actually said. In other words, Obama and his union allies were able to be their own law, which really is the definition of plutocracy.

Don't forget that a lot of the money funding this "Occupy Wall Street" movement comes from the plutocrat George Soros, along with unions and other organizations tied to the Obama administration. And don't you know that in the upcoming political season, a lot of the firms that presently are being targeted are going to pony up and send millions of dollars to Obama and his fellow Democrats in the guise of "campaign contributions"?

Furthermore, the list of "demands" coming from the "Occupy" movement seem a bit suspicious. The immediate end to use of ALL fossil fuels? Hmmm. Sounds like something that might benefit Archer Daniels Midland and all of the "alternative energy" outfits. Gee, maybe the government could force up energy prices so high that even Obama's favorite company, Solyndra, could become solvent again.

No doubt, the president and his friends would not be facing hardships, but those of us who don't have limousines and drivers to take us where we want to go might find it difficult to get to work or even to eat. What better way to empower the state than to turn everyone into outright serfs who would be totally dependent upon the whims of politicians?

Had the banks been forced to liquidate their toxic holdings three years ago, we would not be seeing these "Occupy" demonstrations. Yes, the recession would have been sharp, but not as destructive as Krugman and others claim, and then we would be in a real recovery now. Instead, we are going to have years and years of high unemployment and social unrest.

Sunday, October 9, 2011

Thanks to everyone who contributed to our fund raising campaign to adopt 12 year old Sintija from Latvia. Sintija is with us now and is adjusting well to her new life as part of our family. While we can't adopt any more children, we want to continue to advocate for orphans to find their forever families. Please see our campaign at The Point.

Friday, October 7, 2011

I was wondering when Paul Krugman was going to start praising the "Occupy Wall Street" protests, and he finally is getting on the bandwagon. And like about everything else Krugman does these days, he manages to write commentary without a shred of insight and once again make the claim that if we provide enough of "something for nothing," we can ride that nothing to an economic recovery. Fat chance of that.

Anthony Gregory of the Independent Institute, one of the best young libertarian writers today, has a much more insightful piece, and I link it here because, contra Krugman, Gregory actually understands that governments cannot borrow and print us into prosperity. Gregory notes:

Although there is no single ideology uniting the movement, it does seem to have a general philosophical thrust, and not a very good one at that. OccupyWallStreet.org has a list of demands, and while the website does not represent all of the protesters, one could safely bet that it lines up with the views of most of them: A "living-wage" guarantee for workers and the unemployed, universal healthcare, free college for everyone, a ban on fossil fuels, a trillion dollars in new infrastructure, another trillion in "ecological restoration," racial and gender "rights," election reform, universal debt forgiveness, a ban on credit reporting agencies, and more power for the unions.

In other words, the leaders of the Occupy movement want out-and-out dictatorship, as that is the only thing that can claim to order these things into being. In the world of Paul Krugman and his Occupy friends, government by fiat can overturn laws of science and economics and tax, borrow, print, and spend us into "prosperity."

In this world, only the State produces anything. Do we want "infrastructure?" Hey, no problem! Devote a trillion dollars to it (coming from nowhere) and it will magically appear. Do we want to do away with coal and oil and natural gas? No problem, Mon! Just make the order and we can have "clean, green energy" by fiat. Why bother with laws of science and economics when we can create a "New Science" and a "New Economics" by executive order?

For all of the "change" that Krugman and the Occupy crowd are demanding, I agree with Gregory that the Ruling Class of Washington, D.C., truly has nothing to fear from these folks. The most parasitic people among us are the ones being championed as our heroes and avengers, and I have seen nothing from the Usual Suspects leading this latest "movement" that leads me to believe that what they want is an Obama dictatorship on steroids.

Has there been misconduct on Wall Street? Yes, but the remedy was there three years ago: let the banks and financial houses that "invested" in the "toxic assets" take the bankruptcy haircut. The market would have meted out its "justice" for the stupid decisions they made.

Instead, it has been the government itself that has propped up the bad decisions, with the government -- and especially the Obama administration -- adding even worse decisions every day. However, from what I can tell, Krugman and the Occupy crowd are not satisfied and want out-and-out dictatorship, because ONLY a dictatorship can order what Krugman and company are demanding.

And, in the end, when that fails, who will Krugman blame? I'm sure that he can find his Goldstein, as he is quite good at doing that.

I think I understand why Krugman never has mentioned Steve Jobs in any of his posts or columns. Jobs did not "invest" in giving money to politicians, and he violated the Law of Krugman by saving money and developing products. After all, everyone knows that such things only hold back the economy, which can only move forward when governments implement inflation and other measures of "aggregate demand."

Thus, to people like Krugman, entrepreneurs like Jobs are nothing but parasites. They get rich and don't spend the money where Krugman wants it to be spent. They encourage people not to become bureaucrats or even economists. Furthermore, they don't even finish college; they just DO something, and that is unacceptable in the Wonderland of Krugman.

Thursday, October 6, 2011

One of the things I dislike most about both the Keynesian and mainstream economic paradigms is that they simply ignore the entrepreneur. Either the entrepreneur is simply assumed into the equation, as though what he or she does is "inevitable," or, in the case of the mainstream, irrelevant.

Worse yet, the mainstream economists will throw in the phrase, "new technology," as though a new technological product just appears as though by magic. (When one lacks a coherent theory of capital, nonsense or pure fantasy will fill the void.)

I write these words with the passing of Steve Jobs, whose genius was in the fact that he could see what others could and would not see. It was not just the technology that made Apple so influential and helped produce the Digital Age, but the fact that Jobs realized that technology meant nothing if people did not want to use it.

In celebrating the life and accomplishments of Steve Jobs, it is not that he made a lot of money, or even cared about it. He was not a political force, and Apple did not have a political action fund, nor was it a force in lobbying. While Jobs was alive, Congress and the President did not go after Apple in the way it went after Microsoft and other high-tech firms. Now that he is gone, it will be interesting to see if the federal government attempts to milk political funds from that company in the way that it has done to so many other successful firms that have demonstrated their vulnerability in the face of an unwarranted government onslaught.

No, Jobs was not someone who influenced elections or tried to make bureaucrats (and ultimately taxpayers) do his bidding. His work was much too important for anything like that, and the man truly changed much of his world -- and ours.

I include a number of tributes to Jobs in this post, including this from:

Tuesday, October 4, 2011

With the flavor-of-the-week being blaming China for the economic depression this country caused, Paul Krugman is at it again. At least the theme is constant: a "liquidity trap" changes all the "rules" of economics.

This is a nice way of saying that if Paul Krugman believes the economy is in that "liquidity trap," then he gets to say what the "new rules" of economics are, and the first thing to go is that oppressive Law of Opportunity Cost. He writes:

Now, some people will ask, didn’t I used to be a free-trader? Yes, and under normal circumstances I still mostly am. But these are not normal circumstances! In an economy that isn’t in a liquidity trap, one can reasonably assume that jobs lost due to Chinese exports will be offset by jobs gained elsewhere, although that may be small comfort to the workers affected. Under current conditions, however, there is absolutely no reason to believe that there are offsetting gains — on the contrary, the losses to import competition are magnified through multiplier effects.

Like everything in economics, support for free trade should be based on analysis, not slogans. And if you’re in a situation where the analysis says normal rules don’t apply, then they don’t apply.

The idea of "free trade" is nothing more than a rendition of opportunity cost. One's production decisions are based upon the opportunity costs involved, period.

What Krugman is saying is that our situation today repeals the Law of Opportunity Cost and with it the Law of Scarcity. Thus, we are left with the head-scratching notion that goods no longer are scarce, even as people are being deprived.

(I am sure I will have a host of angry readers claiming I am putting words into Krugman's mouth. All I can say is that by debunking the Law of Comparative Advantage, which is based upon the Law of Scarcity and the Law of Opportunity Cost, Krugman is doing away with those things. There is no way around it, even if Krugman's fans don't like it.)

Monday, October 3, 2011

Paul Krugman received his Nobel Prize three years ago ostensibly for his contributions to theories of international trade. (He actually received it at the time because he was writing anti-Bush columns, and the Swedes were in the anyone-but-Bush mode. A year later, President Barack Obama would receive the Nobel Peace Prize, and we see what he has done with it: employ international death squads.)

...Senate leaders will...take up legislation that would threaten sanctions against China and other currency manipulators.

Respectable opinion is aghast. But respectable opinion has been consistently wrong lately, and the currency issue is no exception.

Why such drastic steps? Krugman spells out what he sees as the problem:

Ask yourself: Why is it so hard to restore full employment? It’s true that the housing bubble has popped, and consumers are saving more than they did a few years ago. But once upon a time America was able to achieve full employment without a housing bubble and with savings rates even higher than we have now. What changed?

The answer is that we used to run much smaller trade deficits. A return to economic health would look much more achievable if we weren’t spending $500 billion more each year on imported goods and services than foreigners spent on our exports.

There is much more in his column defending countries manipulating their currencies in order to make them weaker internationally, including a demand that the U.S. Government do the same. However, since China is "manipulating" its currency to do what Krugman demands we do, China must be the cause of the depression in the USA.

Krugman uses an interesting set of logical steps to reach this conclusion. (1) The government has tried to "stimulate" the economy, (2) the economy still is in a depression; (3) therefore, China must be at fault.

When the Indonesian economy collapsed in the late 1990s, mobs murdered ethnic Chinese merchants. I guess I am grateful that Krugman is not calling for the murder of others, but nonetheless when a Nobel Prize winning economist calls for trade barriers as a way to pull the USA out of a depression, he no longer is practicing economics.

If you ask where Krugman is calling for trade barriers, I think the following quote from his column provides ample proof of that:

In the last few days a new objection to action on the China issue has surfaced: right-wing pressure groups, notably the influential Club for Growth, oppose tariffs on Chinese goods because, you guessed it, they’re a form of taxation — and we must never, ever raise taxes under any circumstances. All I can say is that Democrats should welcome this demonstration that antitax fanaticism has reached the point where it trumps standing up for our national interests.

In other words, opposition to a new tariff on Chinese goods is said to be bad because it is "right-wing" to be against "new taxes." No matter that this would be exactly the kind of measure that would make things worse; no, opposition to a new tariff is bad because Krugman thinks it is a way to score points against "right-wingers."

Before Herbert Hoover signed Smoot-Hawley in 1930, a letter signed by 1,000 academic economists urged the president not to do it. Hoover did it anyway, and the results were tragic.

Today, America's best-known economist is demanding that the Obama administration erect new trade barriers in the wrong-headed belief that restricting trade will create new prosperity. This is beyond economics; it is madness, and it also is very sad, because if Congress carries out the policy that Krugman is demanding, we are going to see the economy quickly go downhill.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).